Another of the largest J-Reits is Nomura Real Estate Office Fund, a thoroughbred from the Nomura stable that has since listing in December 2003 built a reputation as one of the premier property trusts.

The challenge the asset management team faces now is to keep expanding rapidly amid intense competition for new acquisitions.

"Our pedigree is plain for all to see, with our name and controlling shareholder," claims Atsushi Ogata, head of the fund management group at Nomura Real Estate Asset Management, the trust manager for Nomura Real Estate Office Fund (NOF). "The investors have evidently warmed to our name, but also to the focus and quality of our assets, which in the B+ to A prime office segment is perhaps somewhat less intensively competitive than for the grade A+ and grade S office sector."

NOF's management company is 100% owned by Nomura Real Estate Holdings, which is due to list on the Tokyo Stock Exchange by the end of September as the fifth largest publicly traded property company in Japan.

NRE Holdings and Ogata's management company are also planning to set up a second J-Reit, focusing on residential properties. It will be the first time in Japan that a management company has managed more than one Reit.

NOF was the ninth J-Reit to list, in December 2003, and by early August its units had climbed about 80% from the ¥500,000 IPO price set by Nomura as bookrunner and Nikko Citigroup and Merrill Lynch as co-managers. NOF is the fourth largest J-Reit, valued at around ¥240bn in early August.

It listed with a yield of 5% but was by early August trading at a prospective yield of around 3.4% and at a premium to net assets of more than 33%, according to UBS research on August 7.

"I would guess that about 40% of our premium valuation relates to the potential the market sees for growth," says Ogata, "about 30% relates to the perceived skills and experience of the management and the other 30% to the Nomura name. This is a powerful cocktail and one that stands us in excellent stead to remain close to the top of the industry."

Ogata reports that for the office sector on which NOF focuses, the capitalisation rate has fallen to about 4.5% since the trust listed. "But this does not concern us too much at this time," he maintains. "We trade on a low dividend yield and with leverage in the range of 35%-45% and interest rates on our debt still low, we can afford new acquisitions and they would immediately become yield-enhancing."

NOF's last 10 year bond issue in late November 2005 paid a 2.05% coupon.

Rents set to rise

Moreover, Ogata is very optimistic about the potential for raising rents on NOF's buildings. "Portfolio NOI could rise by between 1% and 2% on average annually and we anticipate rises of 20%-30% in the next couple of years, especially for properties in central Tokyo area, assuming the country's economic momentum can be maintained."

NOF benefits from having mostly multi-tenanted buildings and an average lease term of about two years. "This means we can rapidly convert the rising economic tide into higher rental returns from our portfolio, whereas owners with longer tenancy profiles will have to wait longer," Ogata explains. "A rising tide floats all boats, but not at exactly the same time!"

About 80% of NOF's rental uplift potential will come from the expected market rises, Ogata estimates, and about 20% from renovating and upgrading properties. "We are certainly not leaving it to the market to determine our future," he says. "We are working hard to upgrade our assets and our services and thereby also enhance yields."

Office rents are now about 60% of their peak levels during the bubble of the late 1980s, even though more than 16 years have elapsed, for a considerable part of which Japan has achieved economic growth, albeit modest. "We do not, of course, envisage rents reaching those heady heights in the imaginable future," Ogata says, "but we do believe that corporate balance sheets, profitability and general economic progress should give rise to considerable rental increases in the short to medium term."

The sheen on Ogata's crystal ball could be clouded if cap rates fall further than is warranted by the potential for rental increases, and if interest rates rise faster than anticipated. "There are risks and downside, to be sure," he concedes, "but the net result of a more difficult environment should be good for us, as we are conservatively managed and financed and any squeeze should help weed out some of the more marginal, more short term money from the market."

Does NOF's high premium to net asset value worry Ogata? "Not at all," he says. "Appraisal methodologies in Japan are rudimentary and the philosophy very conservative. We believe, for example, that our portfolio should be valued at least 30% higher."

Ogata's enthusiasm for the tasks ahead is evident. "These are remarkably interesting times in which to be a property acquisition vehicle in Japan. The ability of the J-Reit to capture the country's economic upside while at the same time protecting investors from downside risk is a task we take very seriously, and also one that we are very much enjoying."